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Assignment
Exhibit 4 Sample Product Data
Alloy: Condition Round
Conversion: Roller Wire
Die Steel: Chipper Knife
Die Steel: Round Bar
High Speed: Machine Coil
Production (lbs)
478,679
2,081,543
2,413,299
6,697,682
2,530,552
Number of skus
311
473
418
172
102
Number of orders
957
4,163
3,218
3,349
1,012
Bill of Materials (lbs / lb of output)
Steel scrap
1.00
0.00
Alloys
0.01
(@ $48.29 / lb)
(@ $6.29 / lb)
(@ $15.29 / lb)
(@ $152.29 / lb)
Machine Time (min / lb; crew = 1)
Melting (Electric Arc Furnace)
0.20
0.09
Refining (VOD)
0.21
0.10
Molding / Breakdown (Ingot / PFF)
0.12
0.07
0.08
Rolling (CRM)
0.15
0.33
0.03
Finishing (multiple)
0.06
0.02
0.05
Total time
0.69
0.17
0.66
0.44
0.34
Exhibit 5 Standard Cost Results
Standard Cost ($ / lb)
Price
$2.31
$0.77
$1.02
$0.93
$2.33
Materials
$0.54
$0.00
$0.12
$0.21
$1.58
Direct labor
$0.29
$0.07
$0.28
$0.18
$0.14
Direct manufacturing expense
$0.24
$0.06
$0.23
$0.16
Contribution margin
$1.24
$0.64
$0.39
$0.38
$0.49
Contribution margin (%)
53.7%
83.1%
38.2%
40.9%
21.0%
Total contribution
$593,562
$1,332,188
$941,187
$2,545,119
$1,239,970
Manufacturing & administrative overhead
Operating profit
$0.60
($0.25)
($0.26)
($0.15)
Operating profit (%)
26.0%
0.0%
-24.5%
-28.0%
-6.4%
Total operating profit
$287,207
$0
($603,325)
($1,741,397)
($379,583)
Exhibit 6 Lehigh Activity Cost Pools
Activity
Driver
Driver Volume
Amount
Melting: Depreciation
melt machine minutes
5,145,632
$2,139,865
Melting: Maintenance
$975,130
Melting: Utilities
$2,036,477
Refining: Depreciation
refine machine minutes
5,691,042
$1,711,892
Refining: Maintenance
$780,104
Refining: Utilities
$1,745,551
Molding: Depreciation
mold machine minutes
4,226,965
$427,973
Molding: Maintenance
$390,052
Molding: Utilities
$290,925
Rolling: Depreciation
roll machine minutes
8,258,382
$2,995,811
Rolling: Maintenance
Rolling: Utilities
$872,776
Finishing: Depreciation
finish machine minutes
4,057,311
$1,283,919
Finishing: Maintenance
Finishing: Utilities
General & Administrative
pounds
50,299,420
$5,400,955
Material Handling & Setup*
orders
57,147
$4,936,068
Order Processing
$3,953,709
Production Planning
$3,339,500
Technical Support
skus
6,642
$5,766,579
Total
$41,675,296
1. For each of the five sample products, compute the profitability per pound under the ABC system at Lehigh.
2. For each of the five sample products, compute the profitability per pound per unit of the constraint under the TOC approach implemented at Lehigh.
3. Critique the ABC and TOC approaches with respect to determining Lehigh's optimal product mix. Which costing system/perspective should Lehigh use to determine its product mix? Devise an alternative method of calculating profits that combines the insights/assumptions of ABC and TOC in a way that is appropriate for Lehigh's business situation while eliminating those insights/assumptions that are inappropriate in the current situation.
4. Compute the profits for the five sample products under the new method you advocate in #3.
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